This blog, the second part of our investing and trading series, focuses on short-term crypto investing: quantitative and qualitative trading strategies. We’ll explore how these approaches differ and how each can be utilized effectively in the cryptocurrency market.
1. Key pointers
Together, Quantitative and Qualitative Analysis helps understand the crypto market.
Key differences between Quantitative Analysis and Qualitative Analysis:
| Aspect | Quantitative Analysis | Qualitative Analysis |
| Data Type | Numerical and measurable | Non-numerical and descriptive |
| Data | Historical data, metrics, and trends | Market sentiment, news, events, and rumors |
| Examples of Data | Price, volume, transaction data, on-chain metrics | Social media posts, news articles, community discussions |
| Purpose | Predict market trends and price movements | Understand market mood and potential catalysts |
| Tools | Charts, statistical models, algorithms | News monitoring, sentiment analysis tools |
| Objective | Objective, data-driven decisions | Subjective insights and analysis |
2. Quantitative analysis crypto trading strategy
On-chain metrics are essential for evaluating cryptocurrencies and blockchain projects’ health, activity, and potential.
Some traders use quantitative data, AKA on-chain-metrics analysis in cryptocurrency, to predict market trends and coin movements. By the nature of blockchains, these data should be readily available to everyone. For example, this is the quantitative data of our partner, Titanchain.
Key on-chain-metrics may include:
- Network Activity and Usage
- Active Addresses: Number of unique addresses participating in transactions over a specific period.
- Transaction Volume: Total value of transactions conducted on the network.
- Network Fees: Cost associated with executing transactions, reflecting network congestion and demand.
- Security and Infrastructure
- Hash Rate: Total computational power used to secure and process transactions on a proof-of-work blockchain.
- Development Activity: Frequencies of code commits and updates in the project’s repository, reflecting ongoing development and security improvements.
- Market Sentiment and Demand
- Large Transactions: Transactions involving a significant amount of coins or tokens, indicating possible moves by institutional investors or whales.
- Coin Days Destroyed (CDD): Measures the number of days coins have been held before being spent, which can signal market sentiment.
- Supply and Distribution
- Circulating Supply vs. Total Supply: Amount of cryptocurrency in circulation compared to the total supply.
- Wallet Distribution: Distribution of assets across different wallet addresses, indicating centralization or decentralization.
- Exchange Balances: Amount of cryptocurrency held on exchanges, which can signal potential buying or selling pressure.
- Adoption and Growth
- Total Value Locked (TVL): Total assets locked in DeFi protocols, reflecting the popularity and trust in DeFi projects.
- Network Growth Metrics: New addresses created, new nodes joining the network, and other metrics that indicate the growth and health of the network.
- Staking and Validator Metrics (for Proof-of-Stake Blockchains)
- Staking Metrics: Total amount of assets staked, staking rewards, and participation rates, reflecting the health and security of the Proof-of-Stake network.
Summary Table:
| Category | Metric | Purpose | |
|---|---|---|---|
| 1 | Network Activity and Usage | Active Addresses, Transaction Volume, Network Fees | Measure user engagement, network activity, and congestion |
| 2 | Market Sentiment and Demand | Large Transactions, Coin Days Destroyed (CDD) | Gauge market sentiment and potential shifts in demand |
| 3 | Supply and Distribution | Circulating Supply vs. Total Supply, Wallet Distribution, Exchange Balances | Analyze asset distribution and potential supply impacts |
| 4 | Adoption and Growth | Total Value Locked (TVL), Network Growth Metrics | Assess adoption rates and network growth |
| 5 | Staking Metrics | Staking Metrics | Understand staking dynamics and network health for PoS blockchains |
| 6 | Security and Infrastructure | Hash Rate, Development Activity | Evaluate network security and ongoing improvements |
Metrics in the Market Sentiment and Demand category can have immediate market impact, while Supply and Distribution, Adoption and Growth categories may affect the market in the medium term. By relying on hard data, traders are less likely to be swayed by minor price fluctuations or emotional bias. However, traders should also consider qualitative data and technical analysis alongside on-chain-metrics to get a more accurate picture of price movements.
Some of the ways to collect crypto quantitative data:
| Blockchain Explorers | Crypto Analytics Platforms | API and Custom tools | |
| Data | Very detail-oriented Specific wallet, transaction, block |
Marco-oriented
Trend of price movements, Market capitalization, Market share, etc. |
Any data that the services can support |
| Cost | Free on project’s dashboard.May cost money on 3rd-party services. | May have free tier, but advanced data and analytics in paid tiers | May cost in API fee and data storageRequire technical skills |
| Data Availability | Only real-time data | Real-time and historical data | Depend on setup |
| Use cases | Verify transactions
Monitor wallet activity |
Comprehensive market report Predictive analysis Advanced analysis |
Custom-made analysis and reports |
3. Qualitative-based crypto trading strategies
Qualitative-based trading strategy in the cryptocurrency market focuses on factors that cannot be easily quantified but still hold significance to price movements.
1. Event-driven crypto trading strategy
Event-driven trading is a strategy where traders focus on major events like ICOs, regulatory announcements, network upgrades, partnerships, or major economic conditions. Because these major events are scheduled, traders can plan their actions for possible results of the events.
Event-driven trading, therefore, reduces errors that come from reacting impulsively or emotionally. This strategy also reduces uncertainty by focusing only on actual event outcomes, not rumors or misinformation.
However, there are some drawbacks to this strategy. It has limited potential returns since the market price may already reflect these expectations before the events happen. Additionally, if a trader misjudges the impact of an event, it could lead to poor results.
2. News-driven crypto trading strategy
If event-driven is too slow for you, try the news-driven crypto trading strategy. This approach requires constant monitoring of crypto news sources, social media of cryptoi exchanges, or more, then reacts swiftly before the market prices adjust.
News-driven strategy may use advanced tools like automated trading systems and algorithms to detect and analyze news impact for automated trading. The rule of thumb is “positive news triggers buy signals, negative news triggers sell signals”. But in many cases, trading against the news may yield even better results. Speed and accuracy are essential, as the market can react in split seconds.
While this strategy can react faster than event-driven trading and potentially yield higher returns, it also carries higher risks. You may act without a full picture, leading to suboptimal results, and there’s always the risk that the news you react to is misinformation or disinformation.
3. Market-sentiment-driven crypto trading strategy
Market-sentiment-driven crypto trading strategies focus on understanding investors’ overall sentiment when making trading decisions. The idea is that optimism leads to a bullish market, while pessimism leads to a bearish one. This strategy also relies on herding behavior, where traders follow price movements, reinforcing trends. This is especially true in the highly volatile cryptocurrency market, where the majority of traders are retail investors, who often lack discipline and are prone to emotional decisions.
Traders gather data from reports, news, social media, forums, and discussions to estimate market sentiment. Tools like social media analytics and sentiment analysis software help implement this strategy, allowing for a more holistic analysis and potential trades ahead of price movements.
However, this strategy has drawbacks. It can introduce noise, making you vulnerable to manipulation and false signals. Sentiment is volatile and can be influenced by rumors or fake news. Thus, we recommend combining this approach with other forms of analysis for a more comprehensive understanding of the cryptocurrency market.